Shengtai Pharma's Q2 Disappoints

Shengtai Pharmaceutical, Inc. (SGTI.OB) reported disappointing results for its Q2, which ended December 31, 2008. The company recorded $14.8 million in revenue, a drop of 41%, because of a large decline in sales of its cornstarch business. Sales of its other major product, pharmaceutical grade glucose, actually climbed 13% to $9.3 million.

Shengtai attributed the huge falloff in cornstarch sales to the global economic crisis, a dubious sounding claim as food production usually continues at a fairly even level, no matter the economic situation. However, in the conference call, Shengtai officials explained that China cornstarch manufacturers had increased their capacity to sell to international markets. When international markets weakened as manufacturers grew conservative, the domestic market was flooded with supply and the price of cornstarch declined. Shengtai scaled back its production because it was not financially viable to sell at the price levels of 2008’s second half. The company says it has seen a recovery in the price and market since the beginning of 2009.

For Shengtai, pharmaceutical grade glucose is the higher margin product, and the company brought a new glucose manufacturing facility on line in October of last year. Like most China pharma companies, Shengtai points to the new government health plan as a potential stimulus to sales. Shengtai has good reason to be optimistic. Glucose is a basic medical product, and Shengtai owns 40% of the China market, so they are positioned to take advantage of an increase in healthcare delivery to China’s rural population.

The company also said that declining corn prices will help its profit margins, which are low for a pharma company. It reported a gross profit margin of just 14% this quarter, and even in the year ago quarter, when sales were higher, its gross profit margin was only 24%.

Because of the problems, Shengtai’s loss for the quarter was $500,000, a big negative swing from last year’s positive net income of $3 million.

The new glucose manufacturing plant, which was certified in October, raises Shengtai’s production capacity from 60,000 tons per year to 180,000. In fiscal 2008 (ended June 30), Shengtai reported that its revenues climbed 76% to $91 million, and net income rose 46% to $10.4 million.

Investors did not like the downturn in the company’s financial fortunes. Shengtai fell 30 cents (30%) to 70 cents per share in mid-session trading. The company has traded in a range between $.65 and $3.50 over the past 12 months.

Disclosure: none.